When Does a Bank Need a Lawyer on Staff?

For a bank with just over $1 billion of assets, a general counsel on staff might seem to some like an extravagance.

But Kennebunk Savings Bank in Maine has had one since the late 1990s, when it had just $250 million in assets. And now that it is four times that size, it wouldn't want things any other way.

"I can't see living without one at this point," said Bradford Paige, the bank's president and chief executive. "They handle such a wide variety of tasks for us."

Because legal expertise comes with a hefty price tag, most small banks rely on outside counsel. But as banks grow and their business models become more complex – increasing their dependence on attorneys – they generally begin considering whether to hire one on staff.

The right time to create a general counsel position depends on the bank, and has more to do with the bank's business model than its size. Changes to that model and the board's risk tolerance can create more urgency for having in-house legal guidance.

Other reasons to add a staff counsel include going public, pursuing acquisitions, expanding the branch network into multiple states, or adding special lines of business like trusts and brokerages.

One bank that's considering creating an in-house position for a lawyer is Allegiance Bancshares in Houston. Allegiance went public late last year, which generated additional filings and compliance requirements for the now $2.5 billion-asset company. That's created a need to cut management's time dealing with legal issues, said Daryl Bohls, the chief credit officer of the bank unit and corporate secretary of the holding company.

Bohls said he expects the bank to make the hire as it nears $3 billion in assets. "We already have some people in mind," Bohls said, noting Allegiance would prefer an attorney with banking experience. A lawyer unfamiliar with banking might err too far on the side of caution in a business that relies on taking calculated risks.

"Lawyers always try to over-lawyer everything. You don't have to put a belt and suspenders on everything you do," Bohls said. "There are certain risks you have to take."

Thanks to a plain-vanilla business model, El Dorado Savings Bank in Placerville, Calif., won't need general counsel anytime soon, said John Cook, its president and chief lending officer.

The $2.1 billion-asset bank has a straightforward business model of selling mortgages that it keeps in its own portfolio. It doesn't plan for any substantive changes or acquisition-fueled growth. And it is privately held.

"We have boilerplate paperwork for mortgages," Cook said. "While we regularly use legal counsel, we don't anticipate a need for in-house counsel," even when the bank grows to double its size.

For many, keeping noncore activities like legal services outside the bank makes sense. "It's more economical than moving it in house," said Jeff Marsico, an executive vice president with the Kafafian Group, a consulting firm. "This is why banks frequently outsource external audit or compliance or IT."

The $1.3 million-asset Clifton Savings Bank in New Jersey says it doesn't need a general counsel, but for a different reason than El Dorado.

The top banker at Clifton has 25 years as an attorney with a financial institutions practice. Paul Aguggia, the chairman, president and CEO, was most recently the chairman of the law firm Kilpatrick Townsend & Stockton, until he left in 2014 to join Clifton.

Shortly after Aguggia stepped into his banking role, he helped Clifton complete a second-step public offering for its holding company, raising about $180 million.

It is unusual for lawyers to switch to running a bank, but that's starting to change. Rod Taylor, the president of the executive recruiting firm Taylor Mead, said he has noticed more attorneys taking top leadership roles in banking because the industry is contending with increasingly complex legal issues.

"Banking has always been a game of accounting. Now it's a game of legal maneuvering," Taylor said, pointing to the spiraling cost of regulatory compliance, consolidation challenges, and the need to mitigate litigation expenses.

As a bank grows and managing outside counsel becomes onerous, taking time away from strategic planning for the executive team, many banks hire a general counsel to manage the outside attorneys.

One example of a bank that did this is the $2.4 billion-asset Bank SNB in Stillwater, Okla.

With a sprawling multistate branch network, Bank SNB, a subsidiary of Southwest Bancorp., was racking up hefty legal fees for outside attorneys. In 2012 the company brought in Rusty LaForge as general counsel. LaForge also handles investor relations for the holding company.

The new general counsel position helped the company to cut legal fees by 80%, LaForge said.

"I make sure we have the right counsel in each state with the right expertise – the most efficient attorneys in each state for what we are doing there," he said.

Several banking attorneys said having in-house counsel also benefits them as outside counsel because the combination works well to keep the bank out of trouble.

"I always think it is to my advantage to have a trained lawyer that understands the issues and can handle routine things that come up," said Walter Moeling, senior counsel with Bryan Cave in Atlanta. "Then there are those things that are complex – compliance, major transactions. In-house counsel will want the experience of someone who does that routinely."

For most banks it would be out of the ordinary to bring an attorney highly specialized in mergers and acquisitions and securities in-house, but for Midland States Bank it's been the perfect fit.

In 2010, the Effingham, Ill., bank hired Douglas Tucker to be senior vice president and corporate counsel of its parent, Midland States Bancorp. Tucker had previously worked as outside counsel on two acquisitions for the now $3 billion-asset company.

"They brought me in because they were smart enough to know their strategic plan is to grow, and a big part of that is going to come from M&A, and at some point they were likely going to go public," Tucker said. (The company is now listed on Nasdaq.)

"If you know that's your goal, should you hire general counsel whose specialty is real estate or employment law?"

Several industry insiders said it is unusual to hire an acquisition- and securities-focused attorney as general counsel because traditionally the role of the in-house attorney is general in nature.

Still, Tucker said his experience doing acquisitions and taking banks public created opportunities for him to learn best banking practices and how they were implemented. As counsel for an acquiring bank or an investment banking firm that was handling an initial public offering, he would perform due diligence on virtually every area of the target bank's business – corporate governance, employee contracts, loan contracts, real estate holdings, etc. That experience analyzing banks from the inside taught him things that he is able to utilize in the day-to-day legal affairs at Midland States.

Even with in-house counsel, banks will most likely depend on outside counsel for specific issues, several lawyers said. "Hiring in-house counsel will not eliminate outside legal costs," said Chet Fenimore, the managing partner at Fenimore, Kay, Harrison, & Ford. "The legal profession has become very specialized and trying to find one lawyer to do everything is difficult, if not impossible. Essentially the general counsel acts as the legal quarterback for the bank," handing off projects to outside counsel with more experience in particular legal issues confronting the bank.

14-Day Free Trial

The increasing adoption of virtual card payments by accounts payable departments has created an unex­pected complication for suppliers: more friction in the processing, posting and reconciliation of payments and receivables. The root of the problem is that most suppliers rely on a manual approach to processing e-mailed virtual card payments. Suppliers are forced to balance their organization’s need for operational efficiency and control with rising customer demand to pay with a virtual card. But a new breed of tech­nology enables suppliers to process virtual card payments straight-through, addressing the needs of buyers and suppliers. This paper details the growth of electronic business-to-business (B2B) payments, shows how manual approaches to processing virtual card payments cause friction in accounts receivables, describes a way to process virtual card payments straight-through, and highlights the benefits of friction­less payments.